Import Substitution

Definition

Import substitution is an economic policy that aims to replace foreign imports with domestic production. It involves the replacement of imported goods with locally manufactured or produced goods, with the goal of reducing a country's dependence on foreign imports and promoting self-sufficiency and industrialization.

5 Must Know Facts For Your Next Test

1. Import substitution policies often involve the use of tariffs, quotas, or other trade barriers to make imported goods more expensive and less competitive compared to domestic products.
2. The goal of import substitution is to promote domestic industrialization and reduce a country's reliance on foreign imports, which can improve the balance of trade and create jobs in the domestic economy.
3. Import substitution policies are often implemented in developing countries as a way to promote economic growth and reduce poverty by creating jobs in domestic industries.
4. Critics of import substitution argue that it can lead to inefficient, high-cost domestic industries that are not globally competitive and may result in higher prices for consumers.
5. Successful import substitution policies often require complementary investments in infrastructure, education, and technology to support the development of domestic industries.

Review Questions

• Explain the key objectives of an import substitution policy and how it aims to achieve these goals.
  • The primary objectives of an import substitution policy are to reduce a country's dependence on foreign imports and promote the development of domestic industries. By making imported goods more expensive through the use of tariffs or other trade barriers, the policy aims to create a protected market for domestic producers to grow and become more competitive. This is intended to improve the country's balance of trade, create jobs in the local economy, and foster industrialization and economic development.
• Describe the potential benefits and drawbacks of implementing an import substitution policy.
  • The potential benefits of import substitution include the creation of domestic jobs, the development of domestic industries, and improved balance of trade. However, the policy can also lead to inefficient, high-cost domestic industries that are not globally competitive, resulting in higher prices for consumers. Additionally, import substitution policies may limit access to a wider range of goods and services, and can potentially lead to retaliation from trading partners. Successful implementation often requires complementary investments in infrastructure, education, and technology to support the development of domestic industries.
• Analyze the relationship between import substitution and the infant industry argument, and explain how they are connected in the context of economic development.
  • The infant industry argument is closely tied to import substitution policies. The infant industry argument posits that new, domestic industries need temporary protection from foreign competition in order to develop and become competitive. Import substitution policies, such as the use of tariffs or quotas, provide this protection by making imported goods more expensive and less competitive compared to domestic products. The goal is to allow the infant industries time to grow and mature, eventually becoming able to compete on the global market without the need for protectionist measures. However, the success of this approach depends on the ability of the protected industries to actually become competitive, which has not always been the case in practice.

Related terms

Protectionism: An economic policy that restricts or regulates trade between nations in order to protect domestic industries and jobs.

Infant Industry Argument: The idea that new, domestic industries need temporary protection from foreign competition in order to develop and become competitive.

Tariffs: A tax or duty imposed on imported goods, designed to make foreign products more expensive and less competitive compared to domestic products.